Question

On January 1, 2018, Instaform, Inc., issued 12% bonds with a face amount of $65 million, dated January 1. The bonds mature in 2037 (20 years). The market yield for bonds of similar risk and maturity is 14%. Interest is paid semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1-a. Determine the price of the bonds at January 1, 2018.
1-b. Prepare the journal entry to record their issuance by Instaform.
2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2018.
2-b. Assume the market rate was 11%. Prepare the journal entry to record their issuance by Instaform.
3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

Answer 1

Requirement 1 :
				Amount ($)
Interest	65000000*6%	$   3,900,000.00	13.3317*	$    51,993,630.00
Principal		$ 65,000,000.00	0.06678**	$     4,340,700.00
Present Value (prices) of the bonds				$ 56,334,330.00
								Year	Present value @ 7%	Present value @ 5.5%
* Present Value of an ordinary annuity of $ 1 ; n=40 ; I = 7%								1	0.934579439	0.947867299
** Present value of $1 ; n=40 ; i=7%								2	0.873438728	0.898452416
								3	0.816297877	0.851613664
								4	0.762895212	0.807216743
Journal Entry :								5	0.712986179	0.765134354
Date	Accouns title and explaination	Debit	Credit					6	0.666342224	0.725245833
01-01-18	Cash                                 Dr.	$ 56,334,330.00						7	0.622749742	0.687436809
	Discounts on bonds payable Dr.	$   8,665,670.00						8	0.582009105	0.651598871
	To bonds payable A/c		$ 65,000,000.00					9	0.543933743	0.617629261
								10	0.508349292	0.585430579
								11	0.475092796	0.554910502
Requirement 2 :								12	0.444011959	0.525981518
								13	0.414964448	0.498560681
Interest	65000000*6%	$   3,900,000.00	16.04612*	$    62,579,868.00				14	0.387817241	0.472569366
Principal		$ 65,000,000.00	0.11746**	$     7,634,900.00				15	0.36244602	0.447933048
								16	0.338734598	0.424581088
Present Value (prices) of the bonds				$ 70,214,768.00				17	0.31657439	0.402446529
								18	0.295863916	0.381465904
* Present Value of an ordinary annuity of $ 1 ; n=40 ; I = 5.5%								19	0.276508333	0.361579056
** Present value of $1 ; n=40 ; i=5.5%								20	0.258419003	0.342728963
								21	0.241513087	0.324861577
								22	0.225713165	0.307925665
Journal Entry :								23	0.210946883	0.291872668
Date	Accouns title and explaination	Debit	Credit					24	0.19714662	0.276656558
01-01-18	Cash                                 Dr.	$ 70,214,768.00						25	0.184249178	0.262233704
	To premium on bonds payable		$   5,214,768.00					26	0.172195493	0.248562753
	To bonds payable A/c		$ 65,000,000.00					27	0.160930367	0.235604505
								28	0.150402212	0.223321805
								29	0.140562815	0.211679436
Requirement 3 :								30	0.131367117	0.200644016
								31	0.122773007	0.190183901
Date	Accouns title and explaination	Debit	Credit					32	0.114741128	0.180269101
	Investment in Bonds	$ 65,000,000.00						33	0.107234699	0.170871185
	Premium on bonds investment	$   5,214,768.00						34	0.100219345	0.161963209
	To cash		$ 70,214,768.00					35	0.093662939	0.153519629
								36	0.087535457	0.145516236
								37	0.081808838	0.137930082
								38	0.076456858	0.130739414
								39	0.071455008	0.123923615
								40	0.066780381	0.117463142
								Annuity	13.33170884	16.04612469